Term Life vs Whole Life…The War Rages On

For the last several years, there has been a verbal life insurance war going on.  The “verbal war” surrounds sketchy opinions from “financial gurus” as well as numerous Life Insurance Agents/Brokers.  We’re going to touch on the question and controversy of Term Life vs Whole Life insurance.

Is there really a superior product out there?  Is term life insurance the answer to your prayers?

Self proclaimed “experts” would say you should buy only term life insurance (cheap in comparison to Whole Life Insurance in particular) and invest your savings in the stock market instead.  The only explanation is…  You are being “ripped off” on a terrible “investment” when you buy cash value, whole life insurance because it has a terrible rate of return.

Wow, a life insurance policy being compared to the stock market!!  An apples to oranges comparison with little to no risk (Whole Life Insurance) versus high risk (Stock Market) as a basis of comparison on returns. 

What is being thoroughly overlooked…term life insurance is temporary and may not satisfy the goals desired by the owner of the policy to provide guarantees or peace of mind.  Permanent life insurance might be required.

Absolute Life Insurance Distraction

What all these self purported “experts” are failing to see becomes a real problem for life insurance consumers in my opinion. First of all, whole life insurance is not an investment.  It offers guarantees which financial investments do not.

Michigan law prohibits any agent/broker from telling consumers that it is.  Seems kind of odd since the “experts” are telling you that it is an investment in the first place, right?  Why does the state of Michigan say it is not then?

It confuses consumers, that’s why.  To start with, both of these insurance products offer guarantees that “investments” do not.  Life insurance is financial protection first and foremost.  It protects the beneficiary financially from the loss of life of the insured individual.

Now, only a licensed life insurance agent/broker can advise you and market/sell life insurance to you.  Many consumers do not realize this.  If you purchase insurance “direct” from the home office of an insurer, you will be working with a captive agent with that represents only that company.  It is a requirement, the law of the land even when talking to an insurance company “direct” for purchase.  Know the credentials of whom you take advice from.  Remember, some of these financial “experts” are entertainers as well try to sell you something.  Creating controversy draws attention to them.

We are not licensed or insured to provide investment advice but licensed in many states to provide life insurance to consumers.  Special Risk Life is a licensed, independent life insurance agency that offers dozens of the top life insurance companies.  Our business offers and recommends financial protection for your family and business.  We do not offer investment advice but are happy to provide a referral to an excellent Certified Financial Planner (CFP) if needed.

Here is a Dose of Whole Life Insurance Reality

First and foremost, whole life insurance is permanent financial risk protection on the value of someones life to a defined policy beneficiary.  It is not something you buy as an investment.  It is a “financial protection vehicle” sold by licensed life insurance agents, not stock brokers.  Accumulating and compounding cash value is simply a living benefit of the policy.

Many consumers of this type of life coverage may value compounding interest and may use whole life to leverage accrued cash value in the policy elsewhere, but that is not the primary intent of the product, just a feature.

Yes, you do pay interest back to the insurer if you borrow while leveraging, but you are borrowing money that will be compounding on an ever increasing value always moving in an upward direction.  For example, if you have $50,000 in cash value accumulated in a whole life policy and borrow $10,000 to use elsewhere of your choosing, you will still receive compounded interest on $50,000 versus $40,000.  You will have to pay interest on $10,000 to the insurance company, but at a fair rate on the smaller amount.  This adds up over the years even if interest rates have dipped to 2%.  No bank or investment I know of allow this.

The Term Life Insurance Compromise

Many people are just very uncomfortable with investments.  You cannot teach an old dog new tricks nor should you. Investing takes knowledge, emotional discipline and the realization that you can lose money, very quickly.  It can take years to recover from and there are not guarantees you won’t lose your shirt.

Can any of these pro term life advocates guarantee you as a consumers that you will come out way ahead by investing your savings in the stock market years down the road?  Absolutely not.  They certainly act confident about it, but really ignore the means and investment comfort of those they are marketing to.  What happens when the market takes a major hit and the unthinkable occurs?  That’s right, bad timing if those investments tank in retirement years. It may be a decade or more if the investment bounces back.

Now, if you are paying your whole life policy up each month, you  can be assured that your policy cash value will be compounding each and every year after the couple years are behind you.  Whole life insurance cash value rises regardless of the economy. It is guaranteed. Just be sure you understand that cash values in a whole life policy aren’t meant to compete with stock market returns. You should not think of it as a bank account.

Keep This In Mind… Whole Life Insurance is Not for Everyone.

Whole Life is more expensive than term life for obvious reasons.  Whole Life Insurance, if kept by the policy owner will pay out in the future if it is kept in force.  It is permanent life insurance so the insurance carrier is on the hook.  We all will pass on from this life in our own time.  It is a universal truth.  This is the real reason it is more expensive than other forms of life insurance.

Term life insurance is typically only available in our younger years and will not extend beyond age 80.  Life expectancy of people in this country are growing higher and higher due to modern medicine.  If there a need for permanent insurance only you, the individual life insurance consumer can decide.

As people live longer and longer it does change our needs.  Many, many people even the very wealthy have used whole life insurance or other permanent insurance options to handle their estate taxes for years. 

Whole Life Insurance is a guarantee when our time comes, that the named beneficiary of the policy will have monies to continue on in the absence of the insured.  Those monies typically are income tax free and bypass probate.

An investment portfolio has no guarantee on it.  We don’t have to look back to far to see the tumble it took in 2006.  Didn’t bounce back overnight either did it?  What happens if those funds tank and death occurs.  Is your beneficiary a disciplined investor?

So… Are You Saying I Should Buy Whole Life Insurance?

No, I am not, but here are a few reasons many have and will opt to purchase a whole life insurance policy.  These often include:

  • Build-up of cash value.   A benefit of cash value is part of a whole life insurance policy that can never decrease in value – unless the policy holder borrows or withdraws these funds. Over time, these funds can become quite substantial. It is important to choose an insurer with a high rating for financial stability and a policy built to perform if cash value is your goal.
  • Tax advantages. Life insurance policies offer unique tax advantages among financial “vehicles.” Funds within a whole life policy’s cash value account will grow tax deferred. No gain within that account will be taxed until the funds are actually taken.
  • Dividends. Some whole life insurance policies also pay out dividends to the policy holder.  This type of life insurance policy is called a “participating or par policy.” These funds may be taken in the form of a direct check, or they can be reinvested into the cash value component of the policy. Alternatively, dividends may also be used to purchase “paid-up additions” – or additional insurance,  in order to provide the insured with a larger amount of death benefit.
  • Compounding Interest.  All accumulated cash value in the policy earns compounded interest whether you borrow funds from the insurance company or not.  Therefore you are able of borrow the money for a fair interest rate yet earn compound interest on the full cash value in the policy.  In effect, you are able to leverage cash value for a lower rate and use it elsewhere as needed.  What other financial vehicle offers this?
  • Coverage for the insured’s whole life. Certainly, as its name implies, whole life insurance will provide coverage throughout the life of the insured.  This is a time tested, permanent life insurance coverage.  This can help to provide peace of mind in knowing that coverage will never run out, as long as the policy’s premium continues to be paid.  The policy beneficiary is guaranteed to receive the face amount (death benefit) less any outstanding loans you borrowed along the way.

Where do I Stand in The Term Life vs Whole Life Drama?

Now you might have started to believe that I am a “pro” whole life insurance guy. While in some cases, that is very true.  In recent years I have personally chosen a indexed universal life insurance policy cover my needs for my permanent coverage needs.

I do still own some term life insurance to protect my 2 children and invest money in the stock market. Consideration of passing on my estate will become the next phase where the permanent, indexed universal life insurance will be employed. 

Term life insurance is an excellent solution when you just need pure insurance protection for a limited or defined period of time.  It is for the “what-ifs” not the inevitable.

The right life insurance policy for you depends completely on your age, needs, means and goals.

For a family with younger children on a tight budget, 20-30 year term life insurance is usually a good start.  We write a good number of cases in that mold.  These are sometimes blended term life only policies.  Other coverage options exist out there beyond term and whole life as well.  Guaranteed Universal Life (GUL) is has its own market as it is more affordable and offers permanent coverage as well.  Quite a bit cheaper than whole life as well but is currently only available in larger policy such as $100,000 or greater.  This is a great alternative if cash value is not important to you.   It offers permanent, pure life insurance protection for estate planning, pension maximization, charitable giving or anyone looking for excellent affordability. 

I do advocate taking a serious look at Guaranteed Universal Life Insurance against Whole Life Insurance if you need permanent coverage if you need $50,000 or more in death benefits.

All of these different types of policies entail different benefits and cost.  Of course term life insurance is cheap by comparison to whole life.  Coverage is temporary and the risk to the company is much lower.  It also has no cash value in the policy that develops.  The odds are the insurer will not have to pay the beneficiary during the “term” of the policy.

The value of term life insurance is in the peace of mind knowing that if the insured passes away, the beneficiary(s) will have their financial needs met during the time they’re most vulnerable to financial risk.  Term life is very, very affordable so the cost of having pure protection of even high death benefits is quite low.

Here is a good way of thinking about life insurance products.  If you purchase a term life insurance policy, you are renting protection for a specified number of years.  With a permanent coverage such a whole life insurance policy, you can actually own the coverage and it will cover the life of the insured till death occurs.

Term vs Whole Life Insurance Conclusion:

Investing is investing.  You don’t invest to insure yourself…. particularly in the stock market.  The stock market is not bull forever.  The housing crisis, just over 10 years ago now, wiped out a lot of hard earned cash from plenty of “investors.”  I was one of them in fact.  Fortunately, I hung in there, kept it in the market and had it return.  Took several years to bounce back.  Glad I left a good portion of it there.  Wished I had left it all in!!  Will it tank again?  Personally, I think we are due for a big correction as I write this, but only my opinion.

Investing is not for everybody to start with.

You know what, whole life policies will keep on climbing when the stock market takes it’s next dive.  Some people just like security and no worries.  They are happy to live like that.  Don’t knock them for it and don’t insult the people who help them obtain the coverage either.  It doesn’t say much about you as an expert if you don’t listen to different consumers.

There are financial protection strategies to be employed.  Some blend multiple kinds of life insurance for different stages and needs of different people.  This is often the best value and protection you can get when permanent protection is desirable or required.

Again, it really depends on what you need specifically.  Don’t assume blanket advice applies to you.  Find good consultation and work through it.  What are your best options to save money but have your needs met?

We are here to listen to your goals whether it is temporary or permanent coverage needs.  There are dozens of top life insurance companies competing for your business thru our office.  Call today for your free quote.  269-230-3464